Modest world trade recovery continues

The latest monthly indicators for the advanced economies suggest the recovery in world trade has continued over recent months.

More positive for the global economy is the apparent upturn in import demand in the US. The impact on the Eurozone recession of 2011-13, which played a significant role in constraining world trade growth, is also fading with import volumes showing positive growth since late Q3 of last year.

The pace of growth of world trade nevertheless remains moderate, compared to its historical average and with reference to the global cyclical position. We estimate world trade expanded by around 4 percent on the year in Q1 2014, compared to a long-term average pace of 5.7 percent. This means continued difficulties for countries trying to pursue export-led growth strategies.

While trade growth in the advanced economies is generally improving, albeit still subdued, the same cannot be said for the major emerging markets.

China’s annual import growth has edged into negative territory in recent months. The weakness of imports is generally corroborated by the manufacturing PMI – the import sub-component has been below the 50 line separating expansion from contraction since last December.

Annual import growth is also strongly negative in Brazil and Thailand, where economic growth is weak, and mildly negative in India. In other key emergers such as Mexico and Korea, trade growth is in positive territory but is not spectacular. Overall, the emergers remain something of a drag on world trade growth; the contrast between current rates of import growth and the rapid rates seen in 2011-12 is very striking.

Some indicators from Asia suggest an improving picture. Air freight growth in Asia has picked up considerably in recent months, with Hong Kong container shipments also perking up. But one reason for caution is that Asian trade may have been boosted temporarily by the sharp rise in imports in Japan ahead of the rise in the consumption tax there on April 1. This rise is already showing signs of unwinding which may constrain Asian trade in Q2.

One factor that may be behind the relatively slow growth of world trade is a restructuring of global supply chains, reducing the growth in trade of intermediate goods. Over recent decades, supply chains have become more complex, with final products incorporating inputs sourced from an increasingly geographically diverse set of suppliers.

This has tended to make the gross value of world trade expand faster than global GDP – which is a value-added rather than a gross output concept. But this process may now be slowing or even in some cases going into reverse. Firms may now be choosing to simplify their supply chains to balance considerations of cost, risk and efficiency.

The global financial crisis, which caused significant damage to trade finance markets as well as other economic and financial dislocations, may have been partly to blame for this.

Does this matter? On one level, the answer is probably ‘no’. Simpler supply chains do not necessarily mean less impetus from trade to world GDP.

But there are potential distributional effects as some countries concentrate far more on producing intermediate components than others. Asia stands out here, as a region.

A brighter spot among recent data is the pick-up in services trade. This will again tend to favor the advanced economies over the emergers, however. So, one overarching theme from the latest data is that the pattern of development of world trade currently supports the advanced (stronger) versus emerging (disappointing) divide which has been visible in global growth developments over the last year or so.

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